Startups and business plans

Last week, the Boston Globe published an article about the differences between east and west coast investors and their attitudes towards startups. Someone pointed out that the main difference can be found in one line:

“The mentality of East Coast investors is ‘Show me revenue first, and then we’ll talk again.’ "

And while I wouldn’t say that it’s uniformly true, I believe that this fairly describes the current situation. Fast forward a few days when Twitter announced some funding. Elias points to Paul Kedrosky’s post about the degree of importance of a business plan for startups.  Paul’s view is that business plans and profits have overrated importance in the startup world.

While there is certainly a coastal difference in the mentality that you’ll find as far as investors go, there’s another side this story that I recently heard about from someone who spent some time studying startup failures at HBS (names withheld to protect the innocent).

If you know what your business is and how to make money, then just go ahead and do it.   But if you’re in a situation like Twitter where you have something that’s pretty popular and the path to profitability isn’t as clear, then a plan for profitability can be a killer. Why? The reason, according to my source, was that out of the companies that he investigated, the ones that focused initially on profit failed axiomatically (that was the word he used). The goal of making a profit can create artificial boundaries in the early days when things like execution speed, quality of service and user experience really ought to be at the top of the list.  If you have 10M users, you can figure out how to make money.  If you have no users, you’re toast.

Build some Ajax stuff into your site and you could save the user from having to click through five extra pages. But those five extra pages are opportunities lost for serving up ads. Which is more important? As a new user is signing up for your site, do you add in a few extra special offers for partner sites along the way? How do you make these decisions?

My acquaintance who studied these reasons for startup failures seemed to suggest that eliminating the focus on profits was one of the key ingredients for success of the companies that succeeded. Instead, focus everything on making your customers/clients/users happy.

Maybe the west coasters understand that. Or maybe it’s because they’re closer to the showbiz Hollywood world with people all around who understand the value of an audience (and how to sell popcorn and soda to them).